Too Much Globalism
www.forbes.com Jerry Flint, 02.17.03, 12:00 AM ET
It's easy to appreciate the drive for lower costs. The auto industry is terribly competitive. But are labor costs all that important? The most successful vehicle makers are foreign, and they are expanding here. Globalism--also known as the hunt for lower wages--continues apace in the auto industry. Move the work to Canada, where the cheap currency and government-paid health care lower labor costs by a third. Move it to Mexico. Move it to China, where wages are really low. General Motors (nyse: GM - news - people ) will build a new sport utility vehicle, the Equinox. The six-cylinder engine and some other parts will come from China and go to a Japanese-run assembly plant in Ontario. That will save money for sure.
In fact, all Chrysler's PT Cruisers come from Mexico, while Chrysler's new Pacifica wagon and many of its minivans come from Canada. Ford gets all its Crown Victorias from Canada. New York's cab drivers and just about all our police use them.
Partsmakers try even harder to ship work abroad to low-wage countries because they are under enormous price pressure from their automaking customers. Delphi (nyse: DPH - news - people ), the giant partsmaker spun off from General Motors, is the largest employer in Mexico.
It's easy to understand the drive for lower costs. The auto world is terribly competitive. But are automaker direct-labor costs, which account for 8% of a car's price, all that important? The most successful vehicle makers today are foreign: Toyota, Honda, BMW, Mercedes, Nissan and Hyundai. What are they doing? Expanding their manufacturing here.
Nissan (nasdaq: NSANY - news - people ) is building a new plant in Mississippi to build big pickup trucks. The plant isn't in China or Bangladesh. Toyota (nyse: TM - news - people ) is going to announce a new truck plant in a couple months for Texas, not Romania. Honda (nyse: HMC - news - people ) and Mercedes (nyse: DCX - news - people ) are expanding in Alabama, and Hyundai will build a new plant there. BMW is expanding in South Carolina.
Yes, the foreigners have advantages when they build here. They avoid protectionism. They get huge subsidies from those southern states for their plants. And while they pay Detroit wage scales, their nonunion workers are younger, don't get the top rates and aren't collecting pensions yet.
But the point is they wouldn't be building here if it weren't a good place for manufacturing--if, that is, they couldn't get high quality and build at competitive costs. I'm not a fool. I understand Detroit's global thinking: They want not only to lower labor costs but also to spread costs with similar design and engineering for products sold across the world. Building abroad also creates a presence in countries that will in time become good markets, like Korea. And the union and the environmentalists and the lawyers make it tough to do business in the U.S.
Detroit will never dominate the automobile world as it once did. It will never even dominate the U.S. market as it once did. But carmakers don't have to go bankrupt like steel companies or move away like textile companies. The U.S. still is a fine place to manufacture vehicles. What counts is not where the vehicle is built or what the labor costs are. What counts is how good the car or truck is. Americans are proving every day that they will pay more for a vehicle if they think it's better.
Nothing is written in stone in the auto industry, neither the success of the foreign manufacturers nor the decline of Detroit. There are no quitters in this business. At the Detroit Auto Show in January General Motors showed an array of production vehicles coming out over the next 30 months that could lead to a real resurgence. Naturally, the competition from the Japanese and Germans is fierce. And the enemies of the automobile are on the attack. They talk of how cars and trucks pollute (not really, not anymore), how they warm the Earth (maybe, maybe not), how they make us slaves to the oil terrorists (though most of our oil comes from home or Canada, Mexico and Venezuela) and how SUVs kill almost everybody in sight (not true).
With this kind of pressure it's good to have lots of workers at home who vote. This type of thinking might be old-fashioned. Possibly in the future our jobs will consist of moving little electronic bits on computer screens, and manufacturing will be done only in the Third World.
But I can't help recalling an exchange that took place a half-century ago. It was after World War II. A Ford (nyse: F - news - people ) manager was showing off a new Ohio plant to Walter Reuther, head of the United Auto Workers. The manager pointed at the row after row of robotic machines running without workers. He laughed and said something like, "Who's going to join your union?" Walter came back with, "Who's going to buy your cars?"
Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Visit his homepage at www.forbes.com/flint.